Reduce margin feature, for index option sell orders, helps you to lower the required margin by combining the sell order with a deep OTM buy order.
Theoretically, a naked sell position has unlimited risk and hence the margin requirement is more. Having a buy position of the same option type limits the risk and theoretically limits the loss and hence the margin required should also be less. The same principle of hedging is used in this feature
How it works:
1. When the price of the index option being sold is greater than Rs 50 then a deep OTM index option is fetched whose price is less than 10% of the index option being sold.
E.g. BANKNIFTY 48000 CE is being sold whose LTP is Rs 80 then a deep OTM call option will be fetched whose price is lesser than Rs 8 (i.e. 10% of Rs 80) say 49500 CE
2. A buy order of 49500 CE will be placed first at market price and then the sell order of 48000 CE will be placed. First buy order creates a buy position and acts as hedge so the next sell order will require a lesser margin.
1. As explained above, reducing margin involves 1 more buy order to be placed along with the original sell order, so if executed brokerage will be charged as that of 2 orders.
2. Since there will be a buy position created first it will reduce your profit. E.g. Selling naked 48000 CE @ Rs. 80 will fetch a profit of Rs 80 but now selling 48000 CE @ Rs. 80 and buying 49500 CE @Rs 8 will fetch a profit of Rs 72 (Rs. 80 - Rs 8) per lot.
How to use this feature:
Select an index option whose price is greater than Rs. 50 and tap sell button
In order placement screen you will be presented with “Reduce margin” checkbox
Checking the “Reduce margin” checkbox will automatically fetch an appropriate index option whose price is less than 10% of the price of the option you are selling. It will be shown below the “Reduce margin” checkbox
Check the reduced margin for the sell order when combined with the suggestd buy order
Tapping the sell button will first place the buy order and then the original sell order